A dividend ETF built for rising interest rates

Exchange-traded funds holding Canadian dividend stocks are good income-producers in any market environment, but their share price tends to underperform the S&P/TSX Composite Index at times when interest rates are in a rising trend. The reason is simple: Canadian dividend ETFs tend to have higher weightings in three rate-sensitive sectors – utilities, telecom and real estate – than the broader index.

A new ETF from a new player in the sector, Fidelity Investments Canada, offers an opportunity to stay invested in dividend stocks while minimizing the negative effect of rising rates. The Fidelity U.S. Dividend for Rising Rates Index ETF (FCRR) is built differently than Canadian dividend ETFs. “You don’t have a big bet on telecom, you don’t have a big bet on utilities,” said Andrew Clee, vice-president of ETFs at Fidelity Investments Canada. “You get exposure to tech and industrials, which are the best performing sectors in rising rates.”

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There are already lots of U.S. dividend ETFs available to Canadian investors – check them out in the U.S. and international dividend fund instalment of the 2018 Globe and Mail ETF Buyer’s Guide. A difference with FCRR (FCRH is the currency-neutral version) is that it screens a universe of 1,000 or so big blue-chip stocks for those that have performed best when the 10-year U.S. Treasury bond is moving higher.

Fidelity’s move into the Canadian ETF market comes at a time when the field is beyond crowded with players fighting for the attention of investors. Some companies are competing on fees, some on catering to investing trends of the moment and others on using a screening process or active management to deliver results. Fidelity is in this latter group, but it also seems to be following a new strategy of introducing funds that are designed more for current market conditions than as a long-term, buy-and-forget investment.

If you believe, as Fidelity obviously does, that U.S. interest rates will continue to move higher in the near to medium term, then FCRR could be a useful way to hedge your Canadian dividend ETFs. The risk here is that the U.S. economy hits the wall and rates move lower. This kind of economic shift would favour the rate-sensitive dividend stocks that are struggling right now.

Mr. Clee said that while a U.S. high dividend yield ETF might offer a yield of 4.5 per cent before fees, FCRR is likely to be around 3.5 per cent. That’s a result of this ETF’s holdings – more of its assets are in the lower-yielding tech sector than in higher-yielding telecom and utilities.

The management fee for FCRR is 0.35 per cent, which suggests a management expense ratio of roughly 0.4 per cent. That’s competitive among U.S. dividend ETFs, but pricier than your basic S&P 500 fund.

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